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With the opportunity for investors to set up a fund with regulatory protection and significant taxation benefits, establishing a presence in Ireland’s fund industry is surely a safe bet. Mark White reports

Across the hedge fund industry, the most consistently forecast development is the introduction of regulation for hedge funds and their managers.

In the Irish environment, an investment fund may be established that offers regulatory protection to prospective investors. This can be achieved without requiring the fund to sacrifice its investment objectives and alternative strategies or its dynamic and flexible structure. There are also significant taxation benefits that are available to investors in an Irish-regulated fund.

The establishment of a regulated fund in a well-recognised jurisdiction, such as Ireland, offers considerable benefits to investors, particularly in current market conditions. Ireland offers prudent but practical regulation of both retail and sophisticated funds and this is considered to be one of the key reasons for the success of the funds industry in Ireland.

Many investors who wish to gain exposure to alternative asset classes but do not want to invest in lightly-regulated jurisdictions, such as Cayman or British Virgin Islands, can do so by investing in an Irish fund authorised by the Irish Financial Regulator.

Fund structure and service providers

An Irish fund may be established as one of a number of legal structures: an investment company; a unit trust; a common contractual fund; or an investment limited partnership. Irish funds have, to date, been most commonly established as either investment companies or unit trusts.

The primary service providers to an Irish fund are its investment manager, administrator and custodian.

The role of the custodian, which is primarily to hold the fund’s assets in a segregated and secure manner, offers significant comfort to investors. The custodian will be directly liable to the unit holders for any loss suffered as a result of the custodian’s negligence or for any unjustifiable failure to perform its obligations or its improper performance of them.

Retail and sophisticated funds – UCITS and non-UCITS

The most important factors in choosing a fund structure are likely to include the profile and location of target investors and the proposed investment policy of the fund. Each of these factors will be extremely important in deciding whether to structure an investment fund under either the undertakings for collective investment in transferable securities (UCITS) or the non-UCITS regime.

UCITS

The principal advantage of a UCITS fund is that, pursuant to the UCITS Directive, once a UCITS is authorised in one European Union (EU) member state, it can, through a ‘passport regime’, be sold in other EU member states without requiring further authorisations. Given the challenging economic climate, it is reasonable to assume that investors will be looking for a much greater focus on governance, with more emphasis on transparency and risk management – all features that the UCITS regime requires. UCITS have effectively become the global brand for retail investment funds around the world and Ireland has established a reputation as an ideal domicile for well-serviced and well-regulated UCITS.

Since the implementation of certain changes to the UCITS regime in 2003, a UCITS is now permitted to invest in a broader range of assets, including transferable securities, money market instruments, units of other funds, deposits and financial derivative instruments.

As a result, 130/30 funds that combine the investment potential of hedge funds with the perceived traditional strategy of long-only funds can be established as UCITS. In addition, UCITS funds now have the ability to gain exposure to assets such as commodities and hedge funds that cannot be invested in directly by the UCITS. Structured products are now also commonly established under the UCITS regime by virtue of a UCITS’ ability to enter into a variety of derivatives for investment purposes.

Non-UCITS regime

By contrast, since non-UCITS are established pursuant to domestic Irish law, as opposed to EU law, they do not have an automatic ‘passport’ for sale in other EU member states. It follows, therefore, that the Irish Financial Regulator has more flexibility regarding the imposition or relaxation of conditions generally.

A qualifying investor fund (QIF), which is confined to sophisticated investors, is the key non-UCITS fund available in Ireland and has proved to be an attractive option for fund promoters, particularly hedge fund or private equity managers.

In order to invest in a QIF, an investor must subscribe a minimum of E250,000 (£228,000) (or equivalent) and is also required to meet certain net worth tests.

All investment and borrowing restrictions are automatically disapplied in the case of a QIF. Therefore, a QIF is permitted to:

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